If there’s one thing we learned in 2020, it’s that change can happen—and it can come quickly, fiercely, and unexpectedly. In 2020, businesses were met with challenges they could never have predicted, and many had to shut their doors for good. Still others were challenged to move quickly to find creative solutions to adapt to a largely new economic environment.

As we continue our journey through 2021, those businesses that are still in business are facing a buyer’s market that has changed, perhaps permanently. They also must navigate a new political atmosphere and a new perspective of how world events like this may be handled in the future.

For most companies, business can’t continue “as usual” through 2021 without adapting to the new market and better preparing for future challenges.

9 Financial Lessons for Businesses That we Learned from 2020

At Preferred CFO, we are in a unique position to observe the financial impacts COVID-19 had on a large variety of businesses, big and small, during the crisis and extending into today. While many of these businesses were able to survive despite pandemic-related challenges due to smart financial preparation, others survived through strategic financial adaptations and agility.

Below is a culmination of some of the important financial lessons we learned in 2020.

1. Have Healthy Financial Reporting Tools

2020 reaffirmed the importance of having strong, healthy financial reporting tools.

Accurate, timely, and thorough financial reports allow you to identify and overcome financial crises faster and better. They enable you to more quickly identify when revenues and expenses are tracking off course, as well as what, exactly, is being affected. These comprehensive financial reports also allow you to make more informed adjustments or strategic decisions based on the challenges (or opportunities) you are facing.

2. Consider Best, Worst, and Expected Case Scenarios

When you’re looking at your business numbers, it’s important to look at all possible scenarios. Planning only for best-case scenarios locks you into a position that is harder to deviate from if you don’t hit your numbers.

Instead, plan for the best case, worst case, and expected case. Make sure your plan works under any of these scenarios and plan the outcome for each.

There are several benefits to forecasting out these different scenarios. To mention just a few, the first is that it allows you to see at any point which projection you are trending along instead of being surprised when you look at your numbers, “not knowing how bad” (or how good) things are. The second benefit is that it allows you to make strategic adjustments more easily. After all, it’s difficult to determine how to get somewhere unless you first have a clear view of where you are and which direction you’re headed. Benjamin Franklin gave good advice when he said, “If you fail to plan, you are planning to fail!”

3. Have the Ability to Get Creative

One of the things that saved many businesses during 2020 was the ability to get creative in finding additional sources of revenue when their primary line of business saw a downturn. For instance, some distilleries started producing much-needed hand sanitizer, textile companies made masks, and home services companies added sanitizing services to their repertoire.

In a crisis, what creative changes could you make to increase revenues? Could you turn excess inventory into revenue? Discount certain goods and services to increase gross sales? Pivot a product or service to better fit the existing social/economic environment?

Even during a global crisis like the COVID-19 pandemic, there are still businesses or individuals that have money and are looking for opportunities. If you have a mindset of creativity during these challenges, you’re more likely to be able to identify these opportunities and to benefit from them.

4. Strengthen Relationships with Vendors & Customers

During 2020, some financial challenges companies faced were not being able to pay vendors and having customers that were unable to pay. The businesses that were best able to overcome these challenges had positive relationships with vendors as well as customers.

When you have a positive, communicative relationship with your vendors, you’re better able to negotiate favorable terms if your financial situation changes. You may be able to request extended terms, early payment discounts, or other creative solutions to help you fulfill your production or service needs without business coming to a standstill.

Equally, having a positive relationship with your customers allows you to offer these terms. The worst thing that could happen in your sales is having your customers default on payments to your company and not respond to inquiries. With a positive relationship, you can extend payment terms or payment plans to ensure you are able to get paid, even if it’s not right away (late revenue is better than no revenue). These relationships can also better inform you if a customer is heading toward a position where they will not be able to pay and allows you to mitigate risk by asking for payment upfront, pausing services or products, or taking other protective measures.

5. Maintain a Variety of Financing Options

2020 also taught us that it is important to have a variety of financing options available when you need them. Financing is one of the first ways to extend your runway when you have cash flow challenges.

It is highly advisable to always have a line of credit in place, even if you don’t need it. In general, the best time to get financing is when you don’t have an immediate need for it. You never know when you are going to have a rainy day and need outside cash.

A company can have all the revenue in the world, but without the ability to receive cash, or have access to it, the livelihood of the business may be in jeopardy. It is better to be safe than sorry!

6. Do a Product Line Analysis

Like many of the financial lessons we learned from 2020, it’s best to do a product line analysis before you are faced with a significant financial challenge. Knowing the profitability of your products and services can help you make strategic adjustments now, while also enabling you to make more informed decisions if disaster strikes.

7. Evaluate Your Teams

Payroll is the highest cost that most businesses face. In addition, the effectiveness of employees plays a big role in your company’s profitability. This is why it’s crucial to make sure you have a fine-tuned team at all times. A strategic, efficient team means you are maximizing your company’s productivity and profitability while minimizing wasted payroll spends.

If you haven’t evaluated your team members for a while, 2021 is the time to do so. Let go of underperforming employees and reevaluate arms of the business that are not reliably contributing to business revenues and profitability.

There is a funny vintage of, “If You Think It’s Expensive to Hire a Good Accountant Try Hiring a Cheap One.” This same principal applies to all departments. Ensure you have the right people in the right places.

Crises such as COVID-19 put many business owners in the very difficult position of having to make employee cuts when families were already hurting. By making these evaluations and changes during non-emergency times, you’re allowing yourself to have a more level head and think strategically about any cuts that may need to be made.

8. Find Opportunities to be Opportunistic

Even on the best days, an owner should always be looking for opportunities to be more successful. In 2020, this financial lesson was reiterated. For instance, while hundreds of billions of dollars were available in stimulus funding, many businesses did not choose to take advantage of this. Even when it was verified that a majority—if not all—of these funds could be forgiven when used appropriately, some business still did not take advantage of the opportunity. In fact, much of the stimulus money was left on the table between different rounds of funding. This meant many eligible businesses that chose not to apply for PPP instead had to tap into their valuable cash reserves to keep payroll and other hard expenses paid when they otherwise could have used that cash for other purposes.

As mentioned in point 3 above, businesses should also have the ability and agility to be able to take advantage of opportunities when the economic or social climate shifts. For instance, during lockdown, many restaurants quickly jumped on socially distanced takeout orders, patio seating, and more while applying for PPP loans and pushing community-oriented messaging that garnered empathy and support through social media and other means. Anecdotally, many of these restaurants reported at least partially recovered earnings. Other restaurants, however, were unable or unwilling to make strategic changes and didn’t open at all. Compared to the agile, opportunistic restaurants, the non-opening restaurants usually fared far worse, with many having to close their doors permanently.

Business owners should always be on the lookout for opportunities to grow or support their companies. During times of trial and challenge, this becomes more important than ever!

9. When All Else Fails, Stay in Business Long Enough for Something Good to Happen

The final financial lesson we learned in 2020 was to stay in business long enough for something good to happen. In some cases, no matter the preparation, agility, and effort, you just have to weather the storm and survive long enough to have the opportunity for recovery after it passes.

The travel industry was hit extremely hard by COVID-19. In 2020, many travel-related companies, especially those with significant overhead, were unable to keep their doors open after revenues dropped to zero or near-zero levels.

At Preferred CFO, one of our clients experienced this dramatic decline in business. Instead of continuing business as normal until they hit the end of the runway, ran out of cash, and permanently closed their doors, they decided to quickly make adjustments to prolong their business lifespan. They reduced staff to a skeleton crew and cut expenses with the goal of staying in business as long as possible so they would be able to rebuild once the opportunity presents itself.

Final Thoughts

While 2020 was an unprecedented year, the reality is that businesses face devastating challenges every year, even when there is not a global pandemic. Whether these challenges are worldwide events such as the Great Depression or industry/company-specific events, such as material price hikes or the loss of a CEO, most companies will face a disruptive crisis at some point in their lifecycle. The biggest lesson we can take from surviving these crises is to be prepared, be creative, and be nimble.

What financial lessons did you learn during 2020? Let us know in the comments below. Our fractional CFOs are happy to respond to questions, comments, or to schedule a free financial review.

About the Author

Preferred CFO founder and managing partner Jerry Vance of Utah

Tom Barrett is a skilled CFO with extensive experience. His financial expertise is key to helping companies with strategic financial planning, data analysis, risk assessment, budgeting, forecasting, cash flow management, and much more.

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